Securities Exchange Act 1934

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The Securities Exchange Act of 1934

GM520 - Legal Political & Ethical Dimensions of Business April, 12 2010

The Securities Exchange Act of 1934 was passed by congress to strengthen the government’s control of the financial markets. It was preceded by the Securities Exchange Act of 1933 which was enacted during the Great Depression in hopes that the stock market crash of 1929 would not be repeated. The basic difference between the two acts was that the 1933 Act was to govern the original sales of securities by requiring that the issuers, the companies offering the securities, offer up sufficient information about themselves and the securities so that the potential buyers could make informed decisions. The 1934 Act was aimed at the secondary market where buyers don’t buy from the issuer but instead from other investors (Security, 2010). The 1934 Act also required more disclosures from issuers and was enacted to prevent unfair practices at the various exchanges as well as giving the authority of the exchange to the Securities and Exchange Commission which was one of the many administrative agencies set up by the New Deal ideology of Franklin D Roosevelt (Securities, 2003). A major part of 1934 Act is that it required any issuer with over $10 million in assets and 500 or more shareholders to register its stock with the SEC. With this registration came additional required filings such as the 10-Q form, a quarterly financial report, 10-K form, a yearly financial report, as well as an 8-K form used for reporting unusual events, an example of which would be a merger or takeover (Jennings 742). The 1934 Act seems to be an ever changing document as it has been amended by Congress many times through the years. It is due to the need to remedy any new issues that arise whether through technology or new security devices. This paper will focus on two specific sections of the 1934 Act. The first area that I will focus on is Section 10(b) with Rule 10b-5 and the second area that I will focus on is Section 16(b). These sections deal with the antifraud, insider trading and short swing profit issues associated with the trading of securities. Section 10(b) of 1934 Act acts as the insider trader and anti-fraud provision of the act. It was set up to dissuade fraud in the securities market. As example of which would be where sellers might withhold information that should be public and by doing so having an effect on the price. The application of this section is broad as it applies to all the different types of securities for trade. Examples are public, private, over-the-counter and exempt. The only prerequisite for this provision to be in effect is that the transaction must have an interstate commerce connection (Jennings 742). Since in today’s business almost all transactions take place over the internet or via telephone, it would not be very difficult for the Commission to use this provision to bring action against a company or person in violation. One reason for section 10(b) to be included in the 1934 Act was the damage to the market in the late 1920’s and early 1930’s caused by pools. Pools were devices used by certain groups of investors to run up the prices of certain stocks by collectively engaging in well timed transactions. The group would then dump their stocks just before the stock price dropped. Section 10(b) contains provisions to prohibitive this type of deceptive behavior (Securities – Securities.., 2010). This type of behavior led to the writing of Rule 10b-5: Employment of Manipulative and Deceptive Practices. It basically states that it is against the law to use any scheme to defraud, make any untrue or misleading statements or engage in any course of business that defrauds by the means of interstate commerce (Jones, 2009). Corporations can be in violation of section 10(b) when they fail to disseminate material information about the company, its performance or its future. This applies for...
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